Thursday, November 14, 2013

Why an MRI costs $1,080 in America and $280 in France

Why an MRI costs $1,080 in America and $280 in France

Steve Brill's massive Time article focused national attention on the price of health-care services in the United States. Sarah Kliff got further data
showing an MRI can cost anywhere from $400 to $1,861 in Washington, DC
alone. But as startling as the price difference between one hospital and
another, or one insurer and another, can be in America, the difference
between America and other countries is even more extraordinary. I wrote this piece in March 2012. But it's worth revisiting now.
There is a simple reason health care in the United States costs more than it does anywhere else: The prices are higher.
That may sound obvious. But it is, in fact, key to understanding one
of the most pressing problems facing our economy. In 2009, Americans
spent $7,960 per person on health care. Our neighbors in Canada spent
$4,808. The Germans spent $4,218. The French, $3,978. If we had the
per-person costs of any of those countries, America’s deficits would
vanish. Workers would have much more money in their pockets. Our economy
would grow more quickly, as our exports would be more competitive.
There are many possible explanations for why Americans pay so much
more. It could be that we’re sicker. Or that we go to the doctor more
frequently. But health researchers have largely discarded these
theories. As Gerard Anderson, Uwe Reinhardt, Peter Hussey and Varduhi
Petrosyan put it in the title of their influential 2003 study on international health-care costs, “it’s the prices, stupid.”
As it’s difficult to get good data on prices, that paper blamed
prices largely by eliminating the other possible culprits. They authors
considered, for instance, the idea that Americans were simply using more
health-care services, but on close inspection, found that Americans
don’t see the doctor more often or stay longer in the hospital than
residents of other countries. Quite the opposite, actually. We spend
less time in the hospital than Germans and see the doctor less often
than the Canadians.
“The United States spends more on health care than any of the other
OECD countries spend, without providing more services than the other
countries do,” they concluded. “This suggests that the difference in
spending is mostly attributable to higher prices of goods and services.”
On Friday, the International Federation of Health Plans — a global
insurance trade association that includes more than 100 insurers in 25
countries — released more direct evidence. It surveyed its members on
the prices paid for 23 medical services and products in different
countries, asking after everything from a routine doctor’s visit to a
dose of Lipitor to coronary bypass surgery. And in 22 of 23 cases,
Americans are paying higher prices than residents of other developed
countries. Usually, we’re paying quite a bit more. The exception is
cataract surgery, which appears to be costlier in Switzerland, though
cheaper everywhere else.
Prices don’t explain all of the difference between America and other
countries. But they do explain a big chunk of it. The question, of
course, is why Americans pay such high prices — and why we haven’t done
anything about it.
“Other countries negotiate very aggressively with the providers and
set rates that are much lower than we do,” Anderson says. They do this
in one of two ways. In countries such as Canada and Britain, prices are
set by the government. In others, such as Germany and Japan, they’re set
by providers and insurers sitting in a room and coming to an agreement,
with the government stepping in to set prices if they fail.

Click
on the graph for an interactive version. (SOURCE: International
Federation of Health Plans. GRAPHIC: Wilson Andrews - The Washington
Post. Published March 2, 2012.)

In America, Medicare and Medicaid negotiate prices on behalf of their
tens of millions of members and, not coincidentally, purchase care at a
substantial markdown from the commercial average. But outside that,
it’s a free-for-all. Providers largely charge what they can get away
with, often offering different prices to different insurers, and an even
higher price to the uninsured.
Health care is an unusual product in that it is difficult, and
sometimes impossible, for the customer to say “no.” In certain cases,
the customer is passed out, or otherwise incapable of making decisions
about her care, and the decisions are made by providers whose mandate
is, correctly, to save lives rather than money.

In other cases, there is more time for loved ones to consider costs,
but little emotional space to do so — no one wants to think there was
something more they could have done to save their parent or child. It is
not like buying a television, where you can easily comparison shop and
walk out of the store, and even forgo the purchase if it’s too
expensive. And imagine what you would pay for a television if the
salesmen at Best Buy knew that you couldn’t leave without making a
purchase.
“In my view, health is a business in the United States in quite a
different way than it is elsewhere,” says Tom Sackville, who served in
Margaret Thatcher’s government and now directs the IFHP. “It’s very much
something people make money out of. There isn’t too much embarrassment
about that compared to Europe and elsewhere.”
The result is that, unlike in other countries, sellers of health-care
services in America have considerable power to set prices, and so they
set them quite high. Two of the five most profitable industries in the
United States — the pharmaceuticals industry and the medical device
industry — sell health care. With margins of almost 20 percent, they
beat out even the financial sector for sheer profitability.
The players sitting across the table from them — the health insurers —
are not so profitable. In 2009, their profit margins were a mere 2.2
percent. That’s a signal that the sellers have the upper hand over the
buyers.
This is a good deal for residents of other countries, as our high
spending makes medical innovations more profitable. “We end up with the
benefits of your investment,” Sackville says. “You’re subsidizing the
rest of the world by doing the front-end research.”
But many researchers are skeptical that this is an effective way to
fund medical innovation. “We pay twice as much for brand-name drugs as
most other industrialized countries,” Anderson says. “But the drug
companies spend only 12 percent of their revenues on innovation. So yes,
some of that money goes to innovation, but only 12 percent of it.”
And others point out that you also need to account for the
innovations and investments that our spending on health care is
squeezing out. “There are opportunity costs,” says Reinhardt, an
economist at Princeton. “The money we spend on health care is money we
don’t spend educating our children, or investing in infrastructure,
scientific research and defense spending. So if what this means is we
ultimately have overmedicalized, poorly educated Americans competing
with China, that’s not a very good investment.”
But as simple an explanation as “the prices are higher” is, it is a
devilishly difficult problem to fix. Those prices, for one thing, mean
profits for a large number of powerful — and popular — industries. For
another, centralized bargaining cuts across the grain of America’s
skepticism of government solutions. In the Medicare Prescription Drug
Benefit, for instance, Congress expressly barred Medicare from
negotiating the prices of drugs that it was paying for.
The 2010 health-reform law does little to directly address prices. It
includes provisions forcing hospitals to publish their prices, which
would bring more transparency to this issue, and it gives lawmakers more
tools and more information they could use to address prices at some
future date. The hope is that by gathering more data to find out which
treatments truly work, the federal government will eventually be able to
set prices based on the value of treatments, which would be easier than
simply setting lower prices across-the-board. But this is, for the most
part, a fight the bill ducked, which is part of the reason that even
its most committed defenders don’t think we’ll be paying anything like
what they’re paying in other countries anytime soon.
“There is so much inefficiency in our system, that there’s a lot of
low-hanging fruit we can deal with before we get into regulating
people’s prices.” says Len Nichols, director of the Center for Health
Policy Research and Ethics at George Mason University. “Maybe, after
we’ve cut waste for 10 years, we’ll be ready to have a discussion over
prices.”
And some economists warn that though high prices help explain why
America spends so much more on health care than other countries, cutting
prices is no cure-all if it doesn’t also cut the rate of growth. After
all, if you drop prices by 20 percent, but health-care spending still
grows by seven percent a year, you’ve wiped out the savings in three
years.
Even so, Anderson says, “if I could change one thing in the United
States to bring down total health expenditures, it would definitely be
the prices.”

Ezra Klein
is the editor of Wonkblog and a columnist at the Washington Post, as
well as a contributor to MSNBC and Bloomberg. His work focuses on
domestic and economic policymaking, as well as the political system
that’s constantly screwing it up. He really likes graphs, and is on Twitter, Google+ and Facebook. E-mail him here.